Israel’s foreign currency market in August 2017

Weakening of the shekel against
the dollar, while the dollar was mixed worldwide.

In August, the shekel weakened by 2.1
percent against the euro, and by 1.1 percent against the dollar.

Against the currencies of Israel's
main trading partners, in terms of the nominal effective exchange rate of the
shekel (i.e., the trade-weighted average shekel exchange rate against those
currencies), the shekel weakened by about 1.5 percent in July.

Worldwide, the US dollar was mixed
against the major currencies in August. The dollar strengthened by 0.2 percent
against the British pound, while it weakened by 0.9 percent against the euro,
and by 0.3 percent against the Swiss franc.

2. Exchange Rate Volatility

A decline in actual volatility of
the exchange rate, in parallel with a decline in implied volatility.

The standard deviation of changes in
the shekel-dollar exchange rate, which represents its actual volatility,
declined by about 1.3 percentage points in August, to 6.2 percent at the end of
the month.

The average level of implied
volatility in over the counter shekel-dollar options declined by about 0.2
percentage points, to 7.5 percent at the end of August.

In parallel, the implied volatility in
foreign exchange options in emerging markets also declined, to an average of
about 8.6 percent in August compared with 8.8 percent in July. In contrast, the
implied volatility in foreign exchange options in advanced economies increased,
to about 8.1 percent at the end of August, compared with 7.7 percent in July
(Figure 4).

The implied volatility in foreign
exchange options trading is an indication of expected exchange rate
volatility.

3. The Volume of Trade in the
Foreign Currency Market

Total trading volume declined,
with an increase in nonresidents’ relative share of total trading volume.

Total trading volume in foreign
currency in August was about $148 billion, compared with about $154 billion
in July. Average daily trading volume declined by about 8 percent, to about $6.7
billion.

The trading volume in spot and
forward transactions (conversions) was about $33 billion in August. Average
daily trading volume in those transactions declined in August by about 17
percent compared with July.

The trading volume in over the
counter foreign currency options (which are not traded on the stock
exchange) totaled about $7.2 billion in August. The average daily trading
volume in those options declined compared with July, to about $328 million.

The trading volume in swap
transactions totaled about $108 billion in August, compared with about $107
billion in July. Average daily trading volume in swap transactions declined by
about 3 percent compared with the previous month, to around $4.9 billion.

Nonresidents' share of total trade
(spot and forward transactions, options and swaps) increased to about 41 percent
at the end of August. The increase was a result of higher volume of activity by
nonresidents in swap transactions.